Munich Re upgraded by Jefferies on 'exceptional' balance sheet strength

Global reinsurer Munich Re has been upgraded to 'buy' by investment firm Jefferies, citing carriers' "exceptional" balance sheet strength, untapped debt capacity and strong Solvency ratio.

Jefferies' analysts stated that with the market concerned about balance sheet strength amidst the ongoing crisis, Munich Re stands apart for its >€6bn of untapped debt capacity and still having a Solvency II ratio >200 percent.

"Thus, what could once be considered capital inefficiency is now a crucial advantage, with Munich Re best prepared to absorb volatility, while retaining the option to take advantage of any emerging growth opportunities. As such, we upgrade Munich Re to Buy," said Jefferies.

The firm noted that Munich Re has, over the past decade, built itself an enviable position. "At 12%, leverage is half the level of peers, leaving the company with potentially >€6bn of untapped debt capacity. Nevertheless, despite raising less debt capital, the Solvency II ratio remains >200%, without using the transitional measures available.

"This leaves the group with outstanding amounts of high-quality capital to weather the inevitable volatility in both assets and liabilities, while retaining the option to seize growth opportunities."

Commenting on the reinsurer's balance sheet, it said that although there are some areas of high risk in the corporate bond portfolio, we find that in almost all other aspects (structured products, oil and bank exposure), the group is "reassuringly underweight".

The analyst further noted that Munich Re is "comfortably absorbing" the cost of event cancellation claims, and is likely to remain profitable. "As most events in 2020 have now been cancelled or postponed, it is possible for the company to book these losses, meaning that this estimate is unlikely to materially rise in 2H 2020. Most importantly, in spite of this headwind, Munich Re will remain profitable in 1Q 2020."